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Tax
Reform
Policy
Guide
Customs
Issue
Contents
BT to VAT Reform
Guiding Opinions of the
Development of Freight
Forwarding Industry
Pilot Reform of Paperless
Customs Clearance
BT to VAT Reform
Tax reform is ongoing and a 12th five year plan target in China.
To enlarge the scope of VAT and reduce BT accordingly is now high
on the priority list.
The 12-5 objective of BT to VAT reform intends to gradually phase
out BT altogether and replace it with VAT.
In time ,all service-oriented industries would also pay VAT, just like
manufacturing/secondary industries.
BT to VAT Reform
On October 26, 2011, a pilot program of BT to VAT Reform was
announced by the State Council:
Pilot Field: Shanghai, switch from BT to VAT
Targeted Sectors: Transportation ( including road, water, air and pipeline) ;
Modern Services (including logistics support, etc)
VAT rates: , add 11% on transport and 6% on modern services besides
current 17% and 13%
On July 31, 2012, BT to VAT applied to 8 provinces and municipal cities,
including Beijing, Tianjin, Jiangsu, Zhejiang(including Ningbo), Anhui,
Fujian(including Xiamen), Hubei and Guangdong(including Shenzhen).
Benefits to the Logistics Industry
• Under the current tax system, BT applies to each transaction in a supply chain. For enterprises paying BT, the VAT they paid for input materials cannot be used to offset BT; For enterprises using the services of a BT tax payer, the service cost cannot be used to offset their output VAT as well.
• This leads to double taxation. Comparatively, in a VAT system, input VAT can be deducted from output VAT.
Eliminating Double Taxation
• Sometimes it is difficult to judge whether a complicated transaction falls to BT or VAT, or Both.
• The tax reform unifies the taxation and avoid possible extra tax cost.
Reducing the Risk of Ambiguity
• The VAT paid for input materials and equipments can be deducted, and in certain level to shrink their cost. Higher deductable VAT, higher operating profit.
• Most small and medium logistics enterprises may choose to convert to small-scale VAT payers, paying a low rate of 3% tax on service revenues. It is punitive for transport/logistics where the supply chain is many layered and margins low at each layer.
More Tax Relief for Lower Margin Logistics Companies
Problems in Pilot Program
Tax Increasing Risk with high VAT rate and Low Deductable Input VAT for Transport Companies
Inconsistent Tax Rates still Exist
Tax Rate Applied for Express Companies is Ambiguous
Group Companies cannot Pay VAT on a Consolidated Basis
Problem I: Tax Increasing Risk with high VAT rate and Low
Deductable Input VAT for Transport Companies
*Tax burden on support service suppliers such as warehouse operators and freight forwarders has increased mildly;
*While that on companies providing loading/unloading and cargo transport service has increasing risk from 3% to 11%, with low deductable input VAT.
Causes:
*High VAT rate: 3% BT shifts to 11%VAT
*Low VAT input deductibles: only the operating cost for vehicles, fuel and repair is deductable as input VAT, which only account for less than 40% in total cost.
*Other major costs like labor cost, toll fees, house rent and insurance are not deductible.
According to China Federation of Logistics and Purchasing:
*The average tax burden on 65 major Chinese logistics companies was 1.3% during 2008 to 2010 (1.88% for cargo transport).
*In BT to VAT pilot program, the tax burden on cargo transport sector rises to 4.2%, supposed that all VAT-deductable cost is deducted.
*Increased tax burden lowers the profit, which may in turn causes the rise of freight rate, boosting up the commodity price.
*Local authorities have issued temporary policies to offer financial subsidy to enterprises which suffer the rise of taxation. However, this cannot fundamentally solve the problem.
Tax Increasing Risk
1 3
2 4
Problem Ⅱ & Ⅲ
Inconsistent tax rates still exist
Inconsistent tax items, rates and invoices in every layer of the supply chain
restricts the development of the logistics industry.
As business activities are related, it is difficult to divide transportation service
and related support service.
Tax reform shall consider the uniformity of tax on logistics industry.
Tax rate applied for express companies is ambiguous
Express companies are identified unclearly as transport companies, freight
forwarders or telecommunication companies by local tax authorities.
This leads to different applied BT rates.
Under the pilot program, this identity ambiguity still exists, most are assigned
11% VAT rate as transport companies, some are excluded out of the pilot
program, where inconsistence and unfairness arises.
Meanwhile, the major cost of express companies is labor cost which is not
deductable, so resulting to heavier tax.
Problem Ⅳ
Group companies (parent-subsidiary or parent-branch)
cannot pay VAT on a consolidated basis According to the implementation rules of pilot program, “two or more
taxpayers may pay taxes on a consolidated basis under the approval of
Ministry of Finance and State Administration of Taxation”.
A general practice of large-scale logistics companies is centralized
procurement of transport vehicles by parent companies and business
operation by subsidiaries or branches.
Thus the parent companies have considerable input tax balance while the
subsidiaries/branches have few to deduct.
Another situation occurs when a subsidiary forwarding company purchases
transport capacity from a subsidiary transport company. The subsidiary
forwarding company pays VAT at the rate of 6% and deducts the freight at
11%, thus there will be large amounts of input tax balance; while tax rate for
the subsidiary transportation company raises from 3% to 11%, thus taxation
will be largely increased.
If parent companies and its branches and subsidiaries are allowed to pay
VATs on a consolidated basis, the taxation will be well balanced.
Tax
Reform
Policy
Guide
Customs
Issue
Contents
BT to VAT Reform
Guiding Opinions of the
Development of Freight
Forwarding Industry
Pilot Reform of Paperless
Customs Clearance
Guiding Opinions
On January 16, 2013, the Ministry of Commerce issued “Guiding
Opinions of the Development of Freight Forwarding Industry”
(Guiding Opinions), proposing guidelines, principles, targets, tasks
and measures to bring the development of freight forwarding
industry during “the 12th Five-Year Plan”.
Industry Situation
Development Targets
Fundamental Principles
Major tasks
Industry Situation
Up to 2011, the number of registered international freight forwarders
in China had exceeded 27,000, with more than 2 million
practitioners.
Compared with those in developed countries, China’s freight
forwarding industry is generally characterized as smaller size, less
comprehensive functions, less advanced operation means and
limited capacity of professional service.
Development Targets
To reach annual sales growth of 12% for enterprises above the
designated size by transforming the business mode and improving the
service quality.
To select and establish several competitive large-scale international
logistics enterprises with outstanding core business, advanced
management and strong overseas network through M&A.
To cultivate a number of medium and large-sized logistics enterprises
with integrate function, complete facilities and capacity of resource
consolidation.
To develop a group of small and medium-sized forwarding enterprises
with popularity, reputation and professional advantage.
To form an international freight forwarding market with reasonable
structure, various forms, quality service and orderly competition.
Guiding Opinions specifies the basic principles as “ market
driven and government guidance”.
Guiding Opinions stipulates the respective development goal for
small and middle-sized freight forwarders and large ones. Small
and middle-sized freight forwarders are expected to focus on
specialized service while large ones shall transform and upgrade
to comprehensive logistics service, under classified guidance
and orderly competition.
Fundamental Principles
Major Tasks
To improve the industry management system.
To guide the transformation and restructuring of the industry.
To optimize the market environment and follow closely to the development
of SMEs.
To encourage the expansion and globalization of the enterprises.
To innovate management pattern and develop emerging markets.
To improve the information technology level of the industry.
To strengthen the basic work like statistics and qualification assessment for
the development of the industry.
To reinforce the operation of the industry associations.
Tax
Reform
Policy
Guide
Customs
Issue
Contents
BT to VAT Reform
Guiding Opinions of the
Development of Freight
Forwarding Industry
Pilot Reform of Paperless
Customs Clearance
Pilot Reform of Paperless Customs Clearance
On July 31, 2012, the General Administration of Customs issued
Announcement No. 38 [2012], decided to launch a pilot reform program
of paperless customs clearance in a nation-wide range from August 1,
2012.
The customs will examine and verify the data of customs declaration
and accompanying documents submitted by enterprises through China
E-Port, based on the classified management and risk analysis of
enterprises, and the classification of imported and exported products
according to their risk levels.
Scope of Pilot
Pilot Customs
Beijing Customs Imports by air
Tianjin Customs Imports by sea
Shanghai Customs Imports and exports by sea
Nanjing Customs Imports and exports through the special area
supervised by the customs
Hangzhou and Ningbo Customs Imports and exports through customs transit
Fuzhou Customs Imports and exports of trades with Taiwan
Qingdao Customs Exports by sea
Guangzhou Customs Exports by air
Shenzhen Customs Exports by land
Gongbei Customs Imports by land
Huangpu Customs Imports and exports by land through customs transit
Pilot Enterprises
Import and export enterprises and customs brokers classified as category AA or A
Process of Paperless Customs Clearance
Contract Submit E-Docs Clearance
Local Customs
Certification Organization
(China E-Port)
Pilot Enterprise
Paperless Customs Clearance is optional
Enterprises Data of Submitted Documents
Category AA and eligible
to keep docs May keep the paper documents
Category AA but not
eligible to keep docs Shall submit paper documents
within 10 days after release Manufacturing
enterprises of category A
Other enterprises Shall submit paper document at
the same time
Tips on the Paperless Customs Clearance
Declaration Agency: Both the import & export enterprise and the
declaration enterprise should have been allowed by the customs to
apply the paperless customs clearance.
Publicity of Files: Relevant units may review or copy filed data of
customs declaration and accompanying documents.
Temporarily Not Applicable: Imports and exports concerning permits
and licenses (excluding customs clearance permits for
imports/exports).
Revertible: Enterprises may change/cancel the paperless clearance
measure of certain documents through China E-Port.
Prevention and Control: Imports and exports will be randomly
inspected; All of the submitted data will be reviewed after release.
Pilot Cases
On 8:41 am, August 1, 2012, Baoshan Iron & Steel Co, Ltd. declared a
cargo of export cold rolled coils through E-Port. Just 11 seconds later, it
received the notice of release from Shanghai Customs.
On August 23, 2012, a Zhejiang company became the first to submit
online declaration and the system completed the acceptance of the
documents in 31 seconds. On 1:16 pm, Shanghai Customs issued the
release notice through the information platform; and the shipment of 7
containers all arrived at Yangshan Port from 11 pm to 5 am of the next
day.
The Prospect of Paperless Customs Clearance
First Step: a few enterprises with top qualification and credit are
allowed to apply the practice of paperless customs clearance and
keep the paper documents.
Second Step: The application range shall be expanded gradually.
More and more enterprises with qualification and credit shall be
allowed to apply the paperless practice.